Investigating the Red Lea Chickens collapse

Published: July 2018 | By: Michael Sheather

Red Lea Chickens was once considered a great Australian success story. Started by a Croatian refugee after World War II, it grew over six decades to become one of the top chicken processors in NSW. Today, Red Lea is in voluntary administration and chicken farmers are owed millions.

Chicken farmer Stephen Lichtenberger at his property at Marulan near Goulburn. He is owed $270,000 by Red Lea Chickens, which went into voluntary administration just ahead of Easter. Photography by Rohan Thomson. 
NEWS UPDATE: The Association’s special counsel Matthew Waring advises that a Deed of Company Arrangement has been agreed (as of 11 July) by the majority of creditors to return an estimated 12 cents to 15 cents in the dollar for growers. “The administrators will release correspondence shortly calling for final proofs of debt and calculating final amounts.” At a return of 15 cents, chicken farmers will have lost 85% of their invoiced value plus an amount for legal costs, leaving most significantly out of pocket.
 
Read The Farmer magazine's special investigation here:
 Stephen Lichtenberger knows just about all there is to know about growing chickens. He’s been on or around chicken farms all his life. “My parents had a chicken farm when I was born,” he says. “I’ve never done anything else.” Yet even a lifetime of experience and knowledge didn’t prepare him for the financial and emotional stress and the uncertainty that followed the collapse of the Red Lea Chickens empire.

“I’ve been supplying chickens to Red Lea for 28 years,” says Stephen, who grows chickens at Morland Farm at Marulan in South East NSW. “But now they’ve gone out of business. They owe me about $270,000. It’s a damn disappointing situation.” Stephen is just one of 28 NSW chicken growers who have been caught in a financial meat-grinder after Red Lea Chickens Pty Ltd – for decades one of the state’s biggest and most successful chicken production businesses – went into voluntary administration on 29 March this year.
 

Stephen’s farm supplied Red Lea for 28 years. “We just have to keep going as best we can,” he says.

These 28 farmers are owed more than $6 million in total, but the brutal financial reality is that as unsecured creditors, they will be lucky if they ever see even a tiny percentage of what they are owed. Red Lea distributed fresh and cooked chicken products to its own branded stores across the state as well as to other retailers, supermarkets, specialty butchers, restaurants and hotels.

But the company’s total debt is estimated to be about $50 million. Secured creditors, such as banks and financial institutions and, to some extent, employees and their entitlements will get first dibs on any company assets. As in any potential company liquidation, unsecured creditors, including in this case the farmers, are last in line.
 
FINANCIAL TURMOIL FOR RED LEA 

The Red Lea saga has been keenly watched by the leading players in Australia’s chicken production industry for years. The company began more than 60 years ago in 1957 when then 20-year-old John Velcich began raising chickens and selling eggs at his home in 
Blacktown in Greater Sydney. 

John, who fled Croatia as a teenager after World War II, came to Australia with his family in 1953. From a backyard business, Red Lea grew at its peak to be one of the largest poultry meat processing companies in NSW, including nine breeding farms across the state with 500,000 chickens processed each week by more than 500 staff. The company also had a hand in 38 retail stores, either wholly owned or franchised. 

However, the Velcich family eventually ran into its own financial troubles around 2014. A combination of intense supermarket competition and rapidly changing and challenging market conditions combined to wreak havoc with business cash flow. NSW Farmers stepped in on behalf of its members, who were owed $7.9 million in unpaid invoices, and was able to recover all the money back through meetings, legal documents and negotiation.

Despite the troubles, the Velcichs were able to find an overseas buyer for the ailing business – a company controlled by the wealthy Asif family, which runs an international business empire from its base in Singapore.The Asif fortune is founded on a group of companies registered as Hequ Trading, which is the trading arm of the wholly-owned Asif family vehicle, Royal Group Indonesia. It’s described on the Hequ website as an “agro-industrial conglomerate” that administers an extensive and apparently lucrative business trading in jute, palm oil, margarine, soap and, at least until recently, poultry products.

Despite this business experience, it wasn’t long after the Asif family’s company assumed day-to-day control in 2016 that Red Lea’s chicken growers began having some concerns.
“The first 12 months was all right but then they started to cut costs,” says Stephen Lichtenberger. “They thought they’d bring jobs in-house and it would be cheaper, such as the system we used to transport the birds. But sometimes a loading that should have taken a few hours ended up taking all night. Feed deliveries would be cancelled at the last minute without explanation. Sometimes it was chaos.”
 

Red Lea’s problems were becoming apparent from the middle of last year, but the company was still accepting chickens for processing.

FARMERS MISSING OUT ON THEIR DUES 
 
By late last year, NSW Farmers once again became so concerned about the overdue invoices that it began to lobby Red Lea to facilitate payment. The Association’s poultry meat manager Raymond Lee says initially the company said it would look after all its suppliers, and that processes had been put in place to streamline production and increase efficiencies. 
“Some payments were made at that time, but then they fell behind again in the next cycle or only made part-payment to the growers,” Raymond says. “It was all pretty chaotic. But they kept promising that it would all work out and that people would get their money.”

Many of the growers were being paid to raise the chickens to adult birds from chicks hatched at the company breeding farms. Once hatched, the one-day-old chicks would be transported to farms around the state to begin the growing cycle. Trucks would begin arriving about six weeks later to start transporting chickens to the company’s processing plant in Blacktown. As growers, farmers were paid approximately 70 cents per bird.
 

The six-step processing of chickens by Red Lea. 

In Stephen’s case, he grew as many as 270,000 birds in a single cycle for an annual turnover of about $1 million. He says he is owed $270,000, a debt accrued over several cycles. From midway through last year, it became apparent that Red Lea was in trouble. Though the company accepted chickens for processing, payments weren’t coming back to the farmers.

“They were saying, ‘Don’t worry we have plenty of money’,” recalls Stephen. “They said, ‘We have all these assets. If anything goes wrong, then we will sell the assets and we’ll repay the money that is outstanding.’ They were upfront about that. And they didn’t just say it once. They said it a lot.”

As unexpected as the news that Red Lea Chickens had gone into voluntary administration was to some farmers, the report that came out of the first creditors meeting on 12 April was even more alarming. The administrators revealed that while secured creditors and employees might potentially be paid in full, there would be little left for unsecured creditors.
“As it stands, if I get anything then I will be surprised,” says Stephen. 

“I’m not holding my breath, let’s put it that way. That $270,000 is a massive hole in anyone’s budget. And you’ve spent a lot of money to grow those birds. If they don’t pay, then I’ll never get it back. I’ve still got bank loans, mortgages, wages and contractors to pay. That’s the difficulty. I made sure everyone I dealt with got paid. Everyone got paid except me.”
 

Stephen and his wife Keely. 

AUSTRALIAN ASSETS 

But according to documents obtained by The Farmer, companies related to Red Lea Chickens and owned by the Asif family do have substantial assets in Australia, including broiler chicken farms and the land that the Blacktown processing plant sits on. These companies, however, are not in voluntary administration. The Red Lea Chickens administrators have been investigating the reasons for the company’s failure, with key lines of inquiry including the transfer of real estate and fixed assets out of the operating entities and into other companies.

For the present, none of this is of any help to the beleaguered NSW farmers owed money by Red Lea Chickens. Says NSW Farmers’ special counsel Matthew Waring: “These assets are secured behind what is known as the ‘corporate veil’. Corporations law is built on separate liability for companies, generally allowing directors and shareholders limited liability, except in cases of negligence. This protects them from being personally liable for the company’s debts and other obligations.

“No-one is suggesting that the Asif family has done anything illegal,” says Matthew. “In fact, it appears they have been very careful in the way they have attended to their affairs.” 

For now, farmers must wait. “I don’t hold out any great hopes that I’ll see any of that money,” says Stephen. “These blokes can afford all the lawyers and the accountants and all the people who know where to put everything where it is all out of reach. I’m sure it’s all locked away nice and tight. 
 

Keely at the couple’s broiler farm. 

“I’m lucky in that I’ve found someone who wants to make me a supplier, but there’s a lot of blokes out there who haven’t found that. We just have to keep going as best we can.”

The administrators of Red Lea Chickens were contacted for comment. At the time this article was published they had not responded. 

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